Wednesday, 26th October, 2016

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What Is An Arbitrage?

Arbitrage was something that was more common in economic and financial markets, with traders taking advantage of price differences between two different markets to make guaranteed profits at zero cost. With the rise in the amounts of sportsbooks now available, betting arbitrage has become more and more popular.

The reason for this is that each bookmaker will have different opinions and therefore slightly different odds on events. This can result in small profits being able to be guaranteed by spreading bets between different sportsbooks, usually at around 2% to 5%.

For an example of this let’s look at an example of a fictional tennis match between Rafael Nadal and David Ferrer.

5Dimes gives odds of 1.3 for Nadal and 3.5 for Ferrer
Bovada gives odds of 1.45 for Nadal 2.8 for Ferrer.

For each bookmaker, the sum of the inverse of all outcomes of an event will always be greater than 1.
5Dimes = 1.3 − 1 + 3.5 − 1 = 1.0549
Bovada = 1.45 − 1 + 2.8 − 1 = 1.0468

For the sports book, the amount above 1 is the percentage that the bookmaker earns on the bets. So 5Dimes will expect to earn a profit of 5.49% on bets on the event, and Bovada will expect to make a profit of 4.68% on bets on the event.

The aim for someone looking to place a arbitrage using different sportsbooks is to look for where the sum of the inverse of all outcomes is less than 1. In this case this would involve placing a bet on Nadal with Bovada, and a bet on Ferrer with 5Dimes. This would result in a sum of the inverse of all outcomes of 1.45− 1 + 3.5− 1 = 0.975.

In order to lock in a profit you need to place a bet of $100 on Nadal with Bovada, and a bet of (100*1.45)/3.5 = $41.43 on Ferrer with 5Dimes. With a total of $141.43 placed with the two bookmakers, the following would now occur.

Nadal wins – You win $145 from Bovada. Your bet of $41.43 on 5Dimes is lost. Total profit – $3.57

Ferrer wins – You lose $100 with Bovada. You win $145 from 5Dimes. Total profit – $3.57

As you can see from the example above, arbitrage betting using bookmakers can often mean small guaranteed profits. It would require large bankrolls to lock in larger profits, and as a result many smaller gamblers tend to avoid it. However for the frequent punter sports arbitrage betting can result in guaranteed risk free profits.

When making arb bets its important to consider three things – arbs have a short lifetime and thus bets must be made quickly to ensure that the profit is definitely locked in. Any mistakes made can result in there being less of a profit, or a loss made. Bets can also in some circumstances be cancelled for a number of reasons by bookmakers – especially when there is an obvious or palpable error made in the odds, and in the event you can be left with just one side of the bet in place.

There us a alternative version of sports arbitage betting, also known as trading or scalping. This practice has become ever more popular due to the rise of betting exchanges, such as Betfair, have allowed gamblers to become the bookie and lay bets against fellow punters. When placing bets using exchanges its important to bear in mind that exchanges often charge commission outside of their bets – usually just on winning bets, and this must be included in any calculations.

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